Managing Income, Expenses And Cash Flow.
May 04, 2021
By Mahyar K. Hansotia
Here are some tips for contractors to review how they are managing their business’s finances.
The bane of any business can be ensuring that invoices get paid on time. Clearly establish your terms at the outset of a job, and always check the customer’s credit before accepting work. Invoicing promptly is very important, but many contractors find it challenging. Fortunately, there are plenty of invoicing software options available for contractors that can automate the process, keep track of receivables and quickly contact customers with a reminder. For large or lengthy jobs, request a deposit from the customer and issue interim bills at agreed-upon timelines as the project progresses. You may want to consider offering a discount as an incentive for early payment. Many payment terms are still 30 days, but given today’s digital banking environment, credit cards or e-transfers allow for faster collections and can ease cash-flow issues.
Many contracting businesses have larger clients. Oftentimes, these clients will only pay when the cash flow situation suits them, leaving you in a difficult situation as you also have expenses that need to be covered. Because these clients are large, they may constitute a big component of your overall revenue and you don’t really have a choice of walking away. If you find yourself in this situation, consider selling your accounts receivable (also referred to as factoring in accounting terms). Alternatively, you can get a line of credit secured by your accounts receivable.
Gaps in inventory create inefficiencies for everyone, and it can also result in lost revenue, especially for smaller renovators and home builders. Contractors tend to order products at the last minute and keep a minimal amount of materials on hand, but regardless of the size of your business or inventory, a process for tracking – and good communication – is critical. It’s always worth an investment of time to review your supply management system – no matter how basic – and look for efficiencies. It’s also worth leveraging technology, whether using business-specific accounting software or even inventory-tracking apps that can be used on your smartphone. For custom orders, consider requesting prepayment from the customer for parts and materials needed as a way to reduce your expenses.
Contractors should be continually monitoring any discretionary costs, including advertising, promotion, office and vehicle expenses, etc. Get several quotes for fixed expense items such as insurance, bonding and maintenance.
Negotiate interest rates and bank service fees and request volume rebates from suppliers. Finance larger equipment or vehicle investments over several years to smooth out payments. How you choose to finance the equipment will also impact cash flow. Consider the tax implications of different financing methods.
Timeliness is always a best practice. Paying preferred suppliers on time will make it more likely they will help you in a pinch if you need a rush delivery or a hard to find item. Try asking for early payment discounts or extended payment terms. When applicable, review contracts to ensure holdbacks are applied. It can be easy to postpone paperwork but it’s never a good idea. Ensure long-term loan payments are made on time to avoid penalties and maintain good credit reputation. File government reports and remit sales taxes and payroll deductions on time to avoid penalties.
Like it or not, maintaining accurate and up-to-date records is critical to your business’s long-term health. Retaining a qualified bookkeeper will allow you to do what you do best – focus on the business and income generation side of things. Speak to professional advisors such as an accountant or tax professional to help ensure you follow the necessary accounting and tax rules. The benefits to your business will usually outweigh the cost.
Sobel and Company, Professional Corporation is focused on business owners of small- to mid-sized companies, as well as large corporations, who are looking for financial acumen and strategic business expertise over and above traditional chartered professional accountant services.